The Future of Health Care Costs: What Does History Tell Us?

Eduardo Porter has an interesting column reporting the assessment of various experts on the prospective path of health care costs. Near the beginning he quotes a NYT reporter:

"Changes in the way doctors and hospitals are paid — how much and by whom — have begun to curb the steady rise of health care costs in the New York region, ... Costs are still going up faster than overall inflation, but the annual rate of increase is the lowest in 21 years."

Porter then goes on to tell us that the quote appeared in a column written by a long retired colleague in 1993.

Of course any hopes in 1993 that health care costs would be well-contained over the next two decades were mistaken, but things have turned out better than expected. A set of cost projections from the Health Care Financing Administration (the forerunner of the Centers for Medicare and Medicaid Services [CMS]) tells us the consensus view at the time.

These projections showed health care costing 19.8 percent of GDP in 2015 and 26.2 percent in 2040. The most recent projections from CMS show health care spending at 18.4 percent of GDP in 2015 and rising to 19.9 percent of GDP in 2022. The difference between the 1993 projection for 2015 and the most recent projection would come to more than $250 billion in 2015. If we assume a linear growth path between 2015 and 2040, the 1993 projections would imply that health care spending would be 21.6 percent of GDP in 2022, 1.7 percentage points higher than the most recent projections.

This difference is even more striking when considering the size of the projected changes over this period. Health care costs were already close to 13 percent of GDP in 1993. This means that the projection for 2015 implied an increase in costs of 6.8 percentage points. The most recent projections indicate the growth will be just 5.4 percentage points, a difference of more than 20 percent.

In short, the history of the last two decades indicates there was some basis for optimism about the future course of health care spending in 1993. It has risen substantially less rapidly than had been predicted at the time. For what it's worth, life expectancy has actually increased somewhat more rapidly than projected, indicating that the lower than projected spending did not lead to worse health outcomes. On the other hand, the gains in life expectancy have not been evenly shared with those at the top end of the income distribution getting most of the increase and those at the bottom seeing little or no gain.